Why Amazon Quit: Is It Wholesalers?

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FILED OCTOBER 1, 2009

Dear Client:

On Friday afternoon WSD and other media outlets obtained an email sent by giant online retailer Amazon.com to wineries that said they “decided not to resume shipping.” This led people in the industry to believe that Amazon has abandoned their plans to sell wine through their website, AmazonWine.com, which the Wall Street Journal later confirmed. Almost immediately the wine world was alive with tweets and blog posts, most people blasting the three-tier system and well-heeled wholesalers, claiming its “archaic” laws are responsible for Amazon’s failure.

The issue of Amazon exiting the wine business is contentious. Surely many wine retailers, distributors and others viewed Amazon as a threat, while wineries viewed it as a wonderful opportunity to reach untapped consumers. Wineries view this as a disappointing setback for two reasons: 1. Wineries were looking forward to accessing Amazon's millions of ready "one-click" customers, and 2. Both wineries and online retailers were hoping to draft behind the huge retailer's well-known and respected brand name to open up more states to winery/retailer direct shipping.

Daniel Posner, a board member of the Specialty Wine Retailers Association (SWRA) and owner of Grapes the Wine Company, a fine wine retailer in White Plains, New York, expressed his frustration to WSD, echoing the sentiment of others in the industry: “This is just another example of our complicated, archaic laws getting in the way of consumer advantage. Costco.com stopping wine sales is another example. The wholesalers and their greedy paws can claim another battleground victory. Whether they win the war, or not, is still unclear. Eventually, consumers will realize how they are being ripped off under the current system of doing business.”

True, wineries and direct shippers may have lost this battle, but there is still light at the end of the tunnel. Jeff Carroll, vp of compliance at Ship Compliant, believes Amazon’s exit can serve as a motivating factor for wineries.

“If you take away the regulatory hurdles, it would have been a good thing for the industry. It would have floated all boats, brought in more consumers, educated more people about wine and increased sales. We’re in a time of uncertainty in terms of legislation and maybe you could turn this around as a motivating factor to push new legislation in states such as California.

“Let’s get in there, know the regulators and comply with their laws. Eventually good things will happen...I see it as a motivating factor for adopting legislation,” he told WSD.

A MYRIAD OF INTERESTS IN THE WINE BIZ. But let’s take a look at what went wrong and what’s at stake. While wine interests often cite wholesaler self-interest as the major hurdle to getting to direct shipping nirvana, it's more complex than that. There are a whole host of other constituencies with skin in the game, including state regulators, control state executives, public health advocates, and industry policy wonks -- all of whom are vested in preserving a system they contend has worked well for 75 years. They point to the balance between regulation and the wide availability and diversity of beverage alcohol products currently on the shelves and back bars.

There are also other forces at work. Forty-eight states have dram shop laws, which basically say that if a licensed retailer serves alcohol to a visibly intoxicated customer, they are liable if anything bad happens. Is a Fed-Ex driver supposed to police whether patrons are intoxicated? And how does a state punish a misbehaving out-of-state retailer? A Nebraska regulator complained that when they license out-of-state online retailers to sell to Nebraska patrons, if they do something wrong Nebraska can suspend their license, but the retailer can still sell in 49 other states. "That kind of takes the teeth out of our suspension." Not to mention state regulators lack the resources to enforce all the laws. “These regulators don’t have the resources to deal with the businesses in the state not to mention out of the state,” said Craig Wolf, chief of the Wine & Spirits Wholesalers of America (WSWA), to WSD.

Control states also tend to be wary of throwing open their borders to direct shipping, because ultimately the buck stops with the chief director, who is often appointed by and accountable to the Governor. They are also under immense pressure to maximize tax receipts, and while most wineries and retailers are honorable, there are always a few bad apples out there that ship without notice to the state.

“We have a system set up in this country for distribution that is designed to create accountability and responsibility. Amazon to their credit tried to abide by the laws that created accountability. When they found out they were unable to do so in a cost effective way, then they had to at some point bail out,” Craig continued. “The larger issue is if Amazon and its resources couldn’t do it legally, obviously these other companies aren’t doing it legally and taking advantage of the lack of state enforcement.”

WHAT PUSHED AMAZON OVER THE EDGE? Amazon first looked to enter the wine business in March 2008 (not to mention a brief foray in 1999 that ended as soon as it began). Fast forward seven months to October and there was heavy chatter that Amazon was weeks away from launching AmazonWine.com. Clearly, that never happened. What likely broke the camel's back for AmazonWine.com was the fact that their fulfillment partner, New Vine Logistics (NVL), suspended operations briefly this summer after financial difficulties, before securing an investment from Inertia Beverage Group. NVL had reportedly spent millions to upgrade their technology, expand their warehouse facility and hire employees over an 18 month period, all the while expecting revenue from the Amazon deal to start pouring in. The fact that the AmazonWine.com never solidified, along with sales declines stemming from the economic downturn, forced NVL to shut its doors.

But even that may not have been the final blow for Amazon.com. Recall that this summer the California Alcohol Beverage Control (ABC) department issued an advisory saying that the practice of unlicensed websites selling wine, even on behalf of licensed entities, is illegal. Amazon's model would appear to be illegal in its largest state before it even got out of the gate. Here are some snippets from the advisory:

Third party service providers “often involve the operation of Internet websites through which consumers may purchase alcoholic beverages...many are engaging in activities for which a license is required,” says the advisory. In other words, a business must have a license to sell wine and cannot use a fulfillment company like NVL, which has a license, to sell and ship alcohol.

“The Department’s position is that any Third Party Service Provider soliciting orders of alcoholic beverages for or on behalf of licensees is engaged in the ‘sale’ of alcoholic beverages and must hold a license issued by the Department. ‘Solicitation’ includes transactions often described as an ‘offer to purchase’ by the consumer.”

Although some people believe the CA ABC advisory was written specifically for Amazon, there were several other big names trying to enter the wine business, including Sears. The advisory also addresses other regulatory issues, such as questions over central warehousing with 7-Eleven. Many in the wine industry blasted the CA ABC for imposing such a burden on direct shippers, but we can’t forget that regulators don’t make the laws. They simply enforce them.

So while it's easy to lay the blame of Amazon's departure from the industry at the feet of distributors, the reality is that there are many others with a vested interest in a state-based system that they believe works pretty well. They see distributors in a much different light than many direct-shipping advocates: family companies with owners and managers who are very involved in their communities. And they view the three-tier system as one that gives states the ability to control the distribution of alcohol.

So this begs the question: will Amazon and other large retailers take it the courts and seek to overthrow the myriad of state laws? Or has the largest online retailer given up? It remains to be seen. There is a good chance this isn’t the last time we’ll hear from Amazon, and there are certainly other companies that will give it a go at shipping legally to US consumers. This is just the beginning folks.

WE WANT TO KNOW WHAT YOU THINK. Wine & Spirits Daily is equally read by wineries and wholesalers alike, and we want both sides’ viewpoint. Click here and you can answer our three-question survey anonymously.

WSD BRIEFS:

JON MORAMARCO IS JOINING WINE COLLEAGUES as a full partner, the company said today. Recall that Jon served as ceo, international for Constellation Brands until June 2009. Along with Mike Jellison, John will direct the Management Services and Business Development practice, bringing experience and insight to the challenges faced by wineries and wine businesses of all sizes and in all wine market segments. Wine Colleagues offers business advocacy and advice to its clients in the areas of Management and Business Development, Government and Industry Relations, and Marketing and Consumer Research.

TENNESSEE LAWMAKERS WILL AGAIN consider whether supermarkets and c-stores should be allowed to sell wine. According to local reports, the Joint Study Committee on Wine in Grocery Stores could spend as long as a year on the subject.

ITALY’S WINE HARVEST is estimated at 44.5 million hectoliters, about 4% lower than originally forecasted, due to unusually hot weather followed by heavy rain. Italian bulk wine prices were down -13.3% in the first half of 2009 compared to the same period a year earlier, according to their industry trade group.

Until tomorrow, Megan

“In three words I can sum up everything I've learned about life: it goes on.”Robert Frost

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